Building Insurance & Regulation

Insurance Policies Must
Comply with the Governing Law

Under English law, the principle that a
contract must not contain agreements which are contrary to law applies equally
to a contract of insurance.This can
cause insurers to have to pay out very much larger sums than they anticipated:

A factory building
was substantially damaged by fire, causing extensive collapse. The local
authority required the reconstruction of the fire-damaged factory to comply
fully with current Building Regulations. The factory had been partially
demolished by the fire to ground level but parts of the structure were still
largely intact.The building could – but
for the Building Regulations – have been rebuilt, retaining the parts of the
factory which were still intact, to the original standard of construction.This would have complied with the regulations
current at the time the building was built but not those current at the time of
the fire damage.

The local authority
pointed out that, where a building was to be reconstructed from within eight
metres of the ground, the Building Regulations would apply to the whole of the
fabric including the retained part and that the retained part would have to be
brought up to current Building Regulation standards. The result was, to all
intents and purposes, that the factory had to be rebuilt as a brand new
building.

This increased the
claim on the insurance by about £1m. The insurers, an American company, were not
familiar with this peculiarity of English Building Regulations and had not
foreseen, in setting the premium for the insurance, their exposure to this
risk.They nevertheless could not insist
that they had a right to limit cover to the cost of reconstruction to a standard
below that required by statute and so accepted that they would have to pay for a
new building which complied fully with the Building Regulations but which was
otherwise the same as that which had been fire damaged.